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COVID-19 Pandemic, Sustainability of Macroeconomy, and Choice of Monetary Policy Targets: A NK-DSGE Analysis Based on China

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  • Xinping Zhang

    (Economics and Management School, Wuhan University, Wuhan 430072, China)

  • Yimeng Zhang

    (Economics and Management School, Wuhan University, Wuhan 430072, China)

  • Yunchan Zhu

    (Economics and Management School, Wuhan University, Wuhan 430072, China)

Abstract

This paper studies the impact of the COVID-19 pandemic on the sustainability of Chinese economic growth, government debt, and income inequality by constructing a new Keynesian dynamic stochastic general equilibrium (NK-DSGE) model. The choice of monetary policy targets is then analyzed to hedge the impact of the pandemic. We find that: (1) the aggregate demand and labor demand shocks caused by the COVID-19 pandemic posed serious challenges to the sustainable development of the economy and debt, and increased social inequality; (2) when the impact of the pandemic is mainly reflected in the recession in aggregate demand, monetary policy should pay more attention to the target of price stability; (3) when the impact of the pandemic is mainly reflected in a decline in labor demand, monetary policy should focus more on the target of economic growth; (4) when the pandemic has a significant impact on both aggregate demand and labor demand, a monetary policy which focuses more on the target of economic growth is conducive to minimizing welfare losses. Targeted policy implications, such as selecting monetary policy targets according to different manifestations of the impact of the COVID-19 pandemic and placing emphasis on monetary policy tools to stimulate consumption, alleviate unemployment, and alleviate social inequality, are suggested to improve the sustainability of the Chinese economy.

Suggested Citation

  • Xinping Zhang & Yimeng Zhang & Yunchan Zhu, 2021. "COVID-19 Pandemic, Sustainability of Macroeconomy, and Choice of Monetary Policy Targets: A NK-DSGE Analysis Based on China," Sustainability, MDPI, vol. 13(6), pages 1-20, March.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:6:p:3362-:d:519662
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    Cited by:

    1. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    2. Trung Duc Nguyen & Anh Hoang Le & Eleftherios I. Thalassinos & Lanh Kim Trieu, 2022. "The Impact of the COVID-19 Pandemic on Economic Growth and Monetary Policy: An Analysis from the DSGE Model in Vietnam," Economies, MDPI, vol. 10(7), pages 1-19, July.
    3. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Identifying efficient policy mix under different targeting regimes: A tale of two crises," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 975-994.
    4. Behera, Harendra & Gunadi, Iman & Rath, Badri Narayan, 2023. "COVID-19 uncertainty, financial markets and monetary policy effects in case of two emerging Asian countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 173-189.
    5. Gonzalo F. de-Córdoba & Benedetto Molinari & José L. Torres, 2021. "Public Debt Frontier: A Python Toolkit for Analyzing Public Debt Sustainability," Sustainability, MDPI, vol. 13(23), pages 1-25, November.

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